Another Bank of Canada interest rate cut should help B.C. home ...

The central bank cut its overnight lending rate by a half a percentage point, to 3.25 per cent, the fifth such decrease this year

Published Dec 11, 2024  •  Last updated 19 hours ago  •  3 minute read

Continued rate cuts will increase housing affordability with an expected net benefit from reduced mortgage payments even as home prices are likely to rise with increased demand. Photo by NICK PROCAYLO /PNG

The latest Bank of Canada interest rate cut to 3.25 per cent should help home affordability and spur home building, but British Columbians still face affordability headwinds, say observers.

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The bank has signalled a “more gradual” pace for further cuts.

The expected cut is the fifth this year by the central bank and the second half-point cut to the overnight rate. It takes place as real estate sales and home prices in B.C. have slowly begun to increase but remain down from a high in 2022.

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Housing affordability is expected to be a hot topic in next year’s federal election as it was in the recent provincial election.

The Bank of Canada’s overnight rate is important because it’s the main tool the bank uses to set monetary policy and steer inflation and, in effect, the interest rate environment in the country. Rate cuts lead to cuts in mortgage and other lending rates.

Starting in 2022, in the aftermath the COVID-19 pandemic, the central bank had raised the overnight rate 10 times to 5 per cent in an effort to quell inflation, which had been spurred by factors such as disruptions to supply chains, pent-up consumer demand after lockdowns, and the war in Ukraine.

Inflation had reached 8.1 per cent, but was down to 2.02 per cent in November.

What does it mean for housing affordability and prospective homebuyers?

Thomas Davidoff, an economics professor at the University of B.C.’s Sauder School of Business, says the continued rate cuts will increase housing affordability as he expects a net benefit from reduced mortgage payments even as home prices are likely to rise with increased demand.

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He said that lower interest rates are also likely to make rental housing projects more economical and help increase supply, not immediately but in the long run.

“So, I think this is generally good news for affordability,” said Davidoff.

However, Raymond Wong, an affordable housing advocate with the group Housing Action for Local Taxpayers, doesn’t believe reduced mortgage rates will do much to increase affordability generally, particularly as homes prices are sky high in places like Metro Vancouver.

Cutting the Bank of Canada rate at the same time as increasing the insured price cap for mortgages to $1.5 million from $1 million, and expanding eligibility for 30-year mortgages to all first-time homebuyers, simply stimulates demand for housing and will increase prices, argued Wong.

“It’s easier lending. It’s just giving people more money to buy real estate,” he said.

Simon Fraser University economist Andrey Pavlov said while the central bank’s aggressive rate cuts are welcome, he is concerned they are too little too late.

“In addition to these cuts, we need to also take steps to improve the competitiveness of our economy by reducing regulation, red tape and high taxes,” said Pavlov.

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What does it mean for mortgage holders?

Penelope Graham, a mortgage expert with Ratehub.ca, said the half-point rate cut will spell further relief for mortgage borrowers.

She expects the prime rate will fall to 5.45 per cent at most Canadian lenders.

“Those with variable mortgage rates will see either their monthly payments, or the portion of their payment that services interest, fall in kind,” said Graham.

Davidoff said for existing mortgage holders there is no immediate benefit, but in a renewal their mortgage rate would come down if they signed up at a higher rate.

However, since the decrease was expected, he expected any change to the five-year fixed term mortgage to be minimal.

What does it mean for homebuilders?

Davidoff said he also believed the central bank rate cuts will help spark more building because lower mortgage rates will likely spur demand and increase prices.

And it should also help in terms of lower short-term loan rates for developers that will allow them to reduce their borrowing costs for land and building.

“Short term rates matter for the profitability of development,” said Davidoff.

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